WASHINGTON (2/9/12, UPDATED 12:04 p.m. ET)--In a bill the Credit Union National Association (CUNA) says will enhance the safety and soundness of the credit union system, Reps. Peter King (R-N.Y.) and Brad Sherman (D-Calif.) have proposed to permit the National Credit Union Administration (NCUA) to allow credit unions to accept additional forms of capital, provided it does not alter the cooperative ownership structure of credit unions.
Current law restricts credit unions to building their capital levels through retained earnings. Under the newly introduced bill, supplemental capital would have to be uninsured and subordinate to other claims against a credit union.
The bill (H.R. 3993) also authorizes the NCUA to set maturity limits on this capital and restrict the ability to raise supplemental capital to credit unions that are sufficiently capitalized and well-managed.
In a letter to colleagues seeking support for the bill, King said it will provide the NCUA with "the same authority and flexibility to adjust capital requirements in response to changes in economic conditions as Congress has provided to federal banking regulators." They said it also will:
- Rectify a flaw in a 1998 law that is discouraging manageable asset growth by financially healthy credit unions;
- Ensure credit unions can continue to accept new deposit shares--even during tough economic times when demand for loans and other income-generating services are low; and
- Allow credits unions to help keep private sector credit flowing at affordable rates even in recessionary times.
The NCUA has backed an idea to permit a combination of supplemental and risk-related capital for credit unions.
NCUA Chairman Debbie Matz, in letters to the top members of the Senate Banking Committee and the House Financial Services Committee last year, urged statutory changes that would correct the disincentive she said is impacting even strong, well-capitalized credit unions.
She said that, to the detriment of consumers, current credit union prompt corrective action (PCA) rules discourage some credit unions from marketing their desirable products and services out of concern that attracting increased share deposits could deflate net worth positions.
CUNA, in its letter of support for the legislation sent to King and Sherman, said, "The lesson of the most recent financial crisis for financial institutions is that capital is king."
"Capital is also the first line of defense in protecting taxpayers from deposit insurance losses. It is in everyone's best interest to have financial institutions that are well capitalized and able to weather whatever difficulties may occur," CUNA President/CEO Bill Cheney wrote.
"We believe your legislation would provide credit unions with appropriate ability to raise capital from sources other than retained earning without putting in jeopardy the 'one member, one vote' principle that is the bedrock of the credit union ownership structure.
"As credit unions emerge from the financial crisis, this legislation would improve the safety and soundness of credit unions by allowing them to develop a supplement cushion to reduce risk to the National Credit Union Share Insurance Fund."